It appears some business people are no different than investors at extrapolating some moderate change in trend and creating a full blown thesis out of it. Now the irony for those investors who try to use logic is each time a commodity upticks in price even a bit, all the world's pundits (and many of its investors) are ready to deem the price "telling us" about the elusive recovery coming "in 6 months." I am not sure how many times these people's fingers will have to be singed on the stove before they get the idea that every uptick in a Baltic Dry Index, in a steel price, in an oil price is not heralding the next great boom in the world economy. Or even a moderate calm.
Via the Wall Street Journal (emphases are mine)
- Eager to cash in on stimulus packages in China, the U.S. and Europe, some steelmakers are ramping up production. But some are moving too quickly, causing steel prices to drop again after recovering earlier this year. The situation illustrates the dilemma for industries that need to fill the pipeline with construction-critical products but are uncertain about when they will be needed.
- China, in particular, is beginning to see steel prices slide after the capacity utilization of the country's steel mills increased in recent months to about 90% from 75%. Baosteel Group Corp., China's largest steelmaker by output, last month restarted one of its idled mills in anticipation of stimulus-related construction. Angang Steel Co., the listed arm of Anshan Iron & Steel Group Corp., China's second-largest steelmaker, last week said it would increase production this year by 25%, or four million metric tons. The increases are in response to China's $585 billion stimulus program, which will include work on steel-intensive bridges, railroads, roads and buildings.
- Since those projects take time to scale up, steel supply at this point is exceeding demand, sending prices lower. The price for Chinese hot-rolled steel in February rebounded to about $490 a metric ton from about $360 in November. This month, the price has dropped to about $415 because demand hasn't grown as quickly as expected.
- The concern is that the slide in prices could spill over to the U.S. and parts of Europe, where prices have remained relatively steady after falling dramatically several months ago. J.P. Morgan steel analyst Frank Li said an additional 90 million metric tons will be needed as a result of China's economic-stimulus program. But demand will be limited to certain types of steel and some steelmakers have failed to take that into account, the China-based analyst said. The greatest need will be for pipe, rebar, tubing steel and flat-rolled steel for roads, underground pipes and bridges, he said. There will be less immediate need for plate, stainless and other high-value specialized steel related to the aerospace and housing markets.
- Recently, U.S. Steel Corp. (X) said it will temporarily close operations in Canada. ArcelorMittal, (MT) the world's largest steelmaker, has idled plants in the U.S. Both companies declined to comment on their production plans.
- U.S. steelmakers have been cautious about firing up production in response to Washington's stimulus package. They said they aren't sure precisely when steel will be needed and don't want to undercut the prices just when they have begun to stabilize. The steelmakers also said they can increase capacity quickly and that current inventories would be sufficient for immediate sales.
Companies mentioned: US Steel, Arcelor Mittal
Disclosure: No positions